PRODUCTION ANALYSIS

By Mrs. N. Jayaprada Srinivas

INTRODUCTION

In the supply process, people first offer their factors of production to the market. Then the factors are transformed by firms into goods that consumers want. Production is the name given to that transformation of factors into goods.

Production is the process of transformation of inputs into goods and services of utility to consumers and/or producers.

FACTORS OF PRODUCTION
Land - Rent Labour - Wages Capital - Interest Enterprise/Management Profit Technology Raw materials

Types of Inputs Fixed Variable

PRODUCTION FUNCTION
Production function technological relationship between the inputs (factors of production) and outputs over a given period of time. The production function tells the maximum amount of output that can be derived from a given number of inputs. Qp= f {Land, Capital, Labour, Efficiency parameter}

-Always related to a given time period. -Always related to a certain level of technology. -Depends upon relation between inputs.

THE PRODUCTION PROCESS

The production process can be divided into the long run and the short run. The terms long run and short run do not necessarily refer to specific periods of time. They refer to the degree of flexibility the firm has in changing the level of output.

THE LONG RUN AND THE SHORT RUN

A long-run decision is a decision in which the firm can choose among all possible production techniques. A short-run decision is one in which the firm is constrained in regard to what production decision it can make. In the long run, all inputs are variable. In the short run, some inputs are fixed

PRODUCTION TABLES AND PRODUCTION FUNCTIONS

Production table shows the output resulting from various combinations of factors of production or inputs. Total product is total output for a given inputs at a particular time period. Average product is calculated by dividing total output by the quantity of the output. Marginal product is the additional output that will be forthcoming from an additional worker, other inputs remaining constant.

A PRODUCTION TABLE
Number of workers 0 1 2 3 4 5 6 7 8 9 10 Total output 0 4 10 17 23 28 31 32 32 30 25 Marginal product 4 6 7 6 5 3 1 0 2 5 Average product 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5

A PRODUCTION FUNCTION
32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0

7 6 TP Output per worker 5 4 3 2 1 1 2 3 4 5 6 7 Number of workers 8 9 10 3 4 5 6 7 Number of workers (b) Marginal and average product 0 1 2 8 9 MP 10 AP

Output

(a) Total product

THE LAW OF DIMINISHING MARGINAL PRODUCTIVITY (SHORT RUN PRODUCTION FUNCTION)

The most relevant part of the production function is that part exhibiting diminishing marginal productivity. Law of diminishing marginal productivity as more and more of a variable input is added to an existing fixed input after some point the additional output gets from the additional input will fall. Definition: More and more of one factor input is employed, all other input quantities constant, a point will eventually be reached where additional quantities of varying input will yield diminishing marginal contributions to total product

THE LAW OF DIMINISHING MARGINAL PRODUCTIVITY

Number of workers 0 1 2 3 4 5 6 7 8 9 10

Total output 0 4 10 17 23 28 31 32 32 30 25

Marginal product
4 6 7 6 5 3 1 0 2 5

Average product 4 5 5.7 5.8 5.6 5.2 4.6 4.0 3.3 2.5 Increasing marginal returns

Diminishing marginal returns Diminishing absolute returns

THE LAW OF DIMINISHING MARGINAL PRODUCTIVITY

32 30 28 26 24 22 20 Increasing 18 16 marginal returns 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 Number of workers (a) Total product Diminishing marginal returns Diminishing absolute returns

7 6

Diminishing marginal returns

Diminishing absolute returns

TP Output per worker

5 4 3 2 1 AP

Output

10

3 4 5 6 7 Number of workers (b) Marginal and average product

9 MP

10

3 STAGES OF PRODUCTION FUNCTION

Total product Marginal product Average product

Stage I
Increase at an increasing rate Increases and reaches its Increases(but slower maximum than MP) and reaches its maximum

Stage II
Increases at a diminishing rate and becomes maximum Starts diminishing and becomes equal to zero Starts diminishing

Stage III
Reaches its maximum, becomes constant and then starts declining Keeps on declining and becomes negative Continues to diminish but must always be greater than zero

3 STAGES OF PRODUCTION FUNCTION

Increasing Returns Diminishing Returns

MP > 0 > AP

MP > 0 < AP

Negative Returns positive.

MP < 0

while AP is falling but

PRODUCTION FUNCTION WITH TWO VARIABLE INPUTS - THE ISO-QUANT CURVE

Iso-quant curve a curve that represents combinations of factors of production that results in equal amounts of output. A point on the iso-quant curve is technically efficient. Qp = f { L, K }

Labor A B C D E F 3 4 6 10 15 20

Machines 20 15 10 6 4 3

Pairs of Earrings 60 60 60 60 60 60

THE ISOQUANT CURVE

PROPERTIES/CHARACTERISTICS OF ISO-QUANTS
Downward sloping Convex to origin Do not intersect Do not touch axes Do not be vertical, horizontal or upwards

AN ISO-QUANT MAP
Upper curve represents high production Lower curve represents low production

MARGINAL RATE OF TECHNICAL

SUBSTITUTION the rate at which one factor must be added to compensate for the loss of another factor, to keep output constant. It is the slope of the iso-quant curve.

Combinations A B C D E F

Capital (Rs. In lakh) 1 2 3 4 5 6

Labour 20 15 11 8 6 5

MRTS (L : C) 5:1 4:1 3:1 2:1 1:1

TYPES OF ISO-QUANTS

Linear Iso-quant

Input factors are perfect substitutes

c a p i t a l

Iso quant

Units of labour

Input output Isoquant

Input factors are not perfect Compliments. or strict complimentary

c a p i t a l

Iso quant Units of labour

TYPES OF ISO-QUANTS
c a p i t a l

Kinked Iso-quant

Limited substitutability of Capital and labour.

Iso quant

Units of labour

Smooth Convex Isoquant

Continuous substitutability of capital and Labour only over a certain range.

c a p i t a l

Iso quant

Units of labour